Setting up a eQRP vs. SDIRA

[David Chwaszczewski]

Has anyone done an eQRP?  I am looking into the company Total Control Financial, but wanted to see if anyone has setup up one with the company before.  Seems like it may be better control of your money then SDIRA and less fees.  If anyone has setup a eQRP please let me know any Pro's or Con's.

Thanks!

[Nett Victoria]

@Terry Lawson did you end up going with https://www.eqrp.co/? if so, how did it go? i was planning on rolling over a 401k from a previous employer to them while still fully employed with my employer where I have an active 401k plan. what they are suggesting is that they can help set me up as an affiliate (with a landing page online) which I can then share with people i know. i guess that will be the "active work" that will qualify as self-employment. 

it may work, but that will incur $3k one time account setup fee plus $399 yearly fees. are these fees over industry standards for QRPSs/solo-401ks?

[Dmitriy Fomichenko]

@Nett Victoria,

401k is an employer sponsored plan, you need legitimate business with earned income in order to adopt the plan. Having a landing page does not mean you are self-employed, the chances of you selling overpriced plan are pretty low. And if your activity does not produce any income it's not a business but a hobby: 

https://www.irs.gov/spanish/ho...

You can set up a Solo 401k plan for a fraction of those costs. 

[Bernard Reisz]

Here's some helpful perspective, gleaned from experiences in many areas of tax & financial, without addressing the specific company and trademark that are being discussed.

Establishing a 401k/QRP for someone that doesn't qualify can entail tax risks that greatly outweigh any purported benefits of 401k/QRP. Any provider that promotes a specific course of action w/o informing you of the risks presents multiple issues:

1) Such a company is not focused on you; they are focused solely on your credit card.

2) 401k, QRP, SDIRA, LLCs, tax, asset protection, etc. are areas of complexity and you can't possibly identify every risky tax position and protect yourself. The best you can do is find a provider that aims to inform you of any-and-all pros, cons, & risks.

3) Whenever the IRS does start targeting abusers, you don't want to be riding on the leaky ship with the big bullseye on it.

The upshot of all this is that for anything tax related, find someone that's focusing on you and trying to help - not someone promoting a one-size-fits-all approach.

[Terry Lawson]

@Nett Victoria

I decided to go with a SDIRA as opposed to the eQRP.  I didn't feel like I could justify the self employment income because I only have passive income with a rental and work a full-time job.  I plan to establish some self employment income in the future and that time, I may roll over my SDIRA to the eQRP or solo 401k.

[Nett Victoria]

@Dmitriy Fomichenko / @Bernard Reisz - thank you for your the helpful inputs. you've confirmed my gut-feel on the risks going into eQRP given my situation. :)

@Terry Lawson - we have a very similar situation and I feel the same way about not being able to justify self-employment. So, I am more leaning towards doing SDIRA now. Best of luck on your investments. 

[Dmitriy Fomichenko]

@Terry Lawson

You are correct, there is nothing to justify. You simply don't have any. Rental income is passive (investment) income.

https://www.irs.gov/businesses...

[Eric Parrow]

Nobody has clarified if a business that produces both passive income from rentals AND income from Flips and Wholesale deals would qualify for Solo401k.  The income from the flips and wholesale deals are not passive are they? 

[Bernard Reisz]

@Eric Parrow 

Following are some helpful tips, but ultimately you're going to have to find a tax advisor.

- Long-term real estate holds should not be in an S-corp. That is one of the few rules that have almost no exceptions.

- Having diverse streams of income does not disqualify anyone from having a 401k/QRP

- 401k plan loans have rules and there's case law addressing appropriate interest rates. There is latitude, but there are rules and guidelines.

Can't be emphasized enough that it's best to get started with straight-shooting advisors & service-providers from the get-go. Some missteps - but not all - can be rectified.

[Dmitriy Fomichenko]

@Eric Parrow

You are correct that the income from flips and wholesale deals are non-passive and would be considered business or self-employment income. Income from rentals is quite different, and is passive. It is never good idea to mix these incomes in the same entity for two reasons: tax/accounting and liability, you don't want to expose your long term rentals to a liability from flips/wholesaling. 

[John Hyre]

So, a distinction that is not really being addressed here, though it has been mentioned several times:  Is this eQRP a good tool for people who have employees and also want a self-directed 401k?  It is not a Solo K.  Comparing it to one is not helpful.  I "gotta guy" I send people to who sets up SD Safe Harbor 401k's (i.e., a 401k for people with employees) for about $2,500 & charges a like amount per year to maintain them.  I wonder how that compares to eQRP.  From what I have seen of Lupo, he's a very good marketer.  Names a mundane thing something different, makes it all sexy, hypes it up, etc.  I'm more interested in knowing 1)  Is the sexy, hyped, well-marketed product any good and 2)  What does it cost.

No need to explain to me how SDIRA's and SoloK's work....I get that.  Just want to know how the Lupo product compares to other SD401k plans that allow employees.  Curious as to whether it's a safe harbor plan (I'll bet it is) and how much it costs (I'm guessing "more" based on the marketing).

[Bernard Reisz]

@John Hyre Great to see you on this forum and appreciate your vote on my post earlier in this thread. Although we've never met, I've previously come across your content and respect you as a voice for all that can be great in the self-directed space - from both a compliance and strategy perspective.

Regarding your inquiry here, I can't respond to it directly for multiple reasons:

• I would not comment on a specific company or individual
• Marketing terms and trademarks have no inherent meaning - essentially meaningless - and the "product" can being sold using a trademark can theoretically change over time in any number of ways.

That being said, the best way for an expert such as yourself to get answers is directly from "the horse's mouth." Either reach out to them directly or get answers and review docs from multiple folks that have signed up for it.

For the edification of those that don't possess your level of expertise, a few generalities about the QRP & Solo 401k space may prove valuable.

• What is a "Solo 401k?" A "Solo 401k" is a 401k plan for which there are no non-owner employees eligible to participate.
• In other words, "Solo 401k" vs "ERISA plan" has nothing to do with whether your document provider calls it a Solo 401k or something else.
• If a business with no non-owner employees adopts a 401k plan it is a "Solo 401k," regardless of what the document provider calls it.
• If a business WITH non-owner employees adopts a 401k plan - even with a plan document that does not address ERISA, non-discrimination testing, etc., etc., etc. - it is NOT a "Solo 401k" regardless of what the document provider calls it.
• A "Safe harbor 401k" is still a "Solo 401k" if there are no eligible non-owner participants. BUT, if the plan document is not prepared correctly a Solo business that adopts a "Safe Harbor 401k" is - in a best case scenario - "shooting themselves in the foot."
• If a business that does have non-owner employees adopts a 401k plan, THEY SHOULD NOT BUY A DOCUMENT. They need meaningful compliance support from true QRP & 401k experts. Detailed and expert ongoing compliance support is needed. Anyone that buys/sells a QRP document without awareness of the compliance factors and does not engage/provide ongoing support for annual testing and compliance is being reckless.
• To the non-initiated, "Safe Harbor 401k" is just a plan design that's exempt from lots of QRP non-discrimination testing. It does NOT mean that if you buy a Safeharbor 401k document that you're "safe" from severe IRS & DOL penalties if the plan is not operated compliantly.
• From a plan design perspective, "Safe Harbor 401k" is often NOT the optimal design and results in unnecessary costs to the business owner AND missed tax deductions.

[John Hyre]

Bernard Reisz, good post, good info, and a useful explanation for those who do not speak "Attorney-Accountant".  Seems to be your pattern, much appreciated.

I am curious as to plan options for 401k's with employees (so no Solo) that are not "safe harbor".  I have found the latter to simplify matters as to compliance.  For smaller companies the cost of making minimum contributions to employees' 401k's accounts seems like a good trade-off to avoid costs of discrimination testing, etc.  Are there self-directed, non-safe-harbor solutions that are more cost efficient than safe harbor plans that I am missing?  Always looking to learn.  $2,500 set up and a similar per-year cost + contribution costs strike me as pretty reasonable.  But maybe there's something better out there.

The genesis of my chiming in on this thread:  I just put on a SDIRA/401k workshop.  One of the attendees, who is also a client, is consistently sharp (Well, actually, most of the attendees were; the average bear does not take time & money to attend such an event.) and asks good questions.  She had asked about the Lupo product.  I agreed with her that the Special Name is pure branding.  I'm looking to see what is behind the curtain.

Being the curious sort, I will dig into it.  I generally will not discuss custodians (e.g. - which ones I like, etc.) because I'm in bed with (receive clients from) most of them.  But here I see no such risk.  I do not produce or sell plan docs; I merely send clients to whomever I think best.  And plan doc producers do not tend to send me work, so not much economic risk on my end.  I think I'll look for eQRP sample plan docs & feedback (for those interested in sharing, I will preserve your privacy).  I may have a test caller get to the pricing point as well.  If it's a better product, I'll send people that way.  And if it's an over-priced thing (based on sizzle & marketing), I will send my clients to service providers who provide the same or better quality, minus the mark-up for sizzle.

[Justin Windham]

@John Hyre

That's great that you are looking into this. From watching this topic for quite some time, I know there are quite a few of us who have the same curiosity.

@Bernard Reisz - thanks for your ongoing contributions in this area!

[Bernard Reisz]

@John Hyre & @Justin Windham For purposes of clarity, I've seen it - so no curiosity here.

@John Hyre Regarding plan design, Safe Harbor is the "last choice" - not the first. Once all options are explored and deemed not to be feasible should a "Safe Harbor" plan be adopted. Of course, for many - if not most - small businesses, Safe Harbor is the way to go. Still, defaulting to Safe Harbor results in many business owners missing huge tax deductions and/or unnecessarily over-contributing to employees. 

"One-size-fits-all" financial & tax products/services are the hallmark of a "provider" taking shortcuts to increase their own revenue and profit at the expense of "clients." It requires real effort to explore all options, based on each client's tax profile and objectives.

In some instances, such as "Safe Harbor" vs Non-Safe Harbor, not exploring all options "just" means incremental increased cost and missed deductions to some clients. Not ideal and not the route I'd advocate, but bearable.

In other instances, in which a financial/tax service provider promotes non-compliance to unwitting consumers, the potential costs can be astronomical to all clients.

Consumers of financial & tax services should always seek - and get - total transparency from their service/product providers.

[Muriel Brisson-Jackson]

This thread was really good - thank you so much to all the experts who contributed to the excellent discussion.

I am exploring opening a SD 401k because I specifically invest in real estate and don't want to be subject to UBIT. I had a call with eQRP and can confirm that when it moves from family to non-owner employees - it is safe harbor.

@John Hyre If you still need info on pricing etc PM I can share. 

Again thank you all - very, very informative.

[John Hyre]

@Muriel Brisson-Jackson, remember, 401k's/QRP's are subject to the same UBIT rules as IRA's, with a very relevant exception: IRA's that borrow to acquire or improve real estate pay UBIT, while a 401k would not. But if the proceeds of borrowing or of a refi on RE are used for non-RE (e.g. - to lend, buy BTC, buy notes, etc.), then the 401k pays UBIT like an IRA. Likewise, if a 401k runs a "continuous trade or business" or rents out personal property, it is subject to UBIT just like an IRA. I very often see posts to the effect of "401k's/QRP's are exempt from UBIT". Such statements are mistaken and much too broad. With that said, the ability to borrow to acquire or improve RE is a big, big deal. I personally used it in my Roth 401k to acquire rentals that we are now selling.

PS:  If you would PM the cost information, I certainly would appreciate it.  Thanks!

[Bernard Reisz]

@John Hyre Appreciate you mentioning this. I've had too many interactions in which I've attempted to convey to folks that Qualified Retirement Plans are subject to UBIT, including that resulting from UDFI - with only a LIMITED real estate exemption - only to be told that so-and-so "expert" knows how to set up retirement plans that are completely exempt from UBIT. 

Overall, industry players that just want to sell one-size-fits-all self-directed retirement account paperwork mistreat UBIT, UBTI, and UDFI - either by omission or overemphasis. There are of course excellent service providers that truly aim to deliver value and investors just need to be discerning. 

Although I wish the following would not hold true, alas it always has and still does: Caveat emptor!

[Chihying Jenny Wang]

This thread is fantastic!  It has answered many of my questions, but also created new ones.  

1) I currently have a solo 401K (set up and "professionally managed' by Fidelity). In order for it to be converted to a "Checkbook 401K" where I can self direct investments to REI, what do I need to do?

2) Is the marketing term eQRP essentially just a solo 401K paired with a trust?  That's what I took out from this thread, but need confirmation.  If so, how do I pair my existing 401K to a trust?   

3) Are there advantages or disadvantages to pairing the 401K to a trust vs. a LLC for asset protection?

4) Can I roll my "Rollover IRA" money into a checkbook 401K? Is Rollover IRA the same as Traditional IRA?

Thank you!

-Jenny

[Justin Windham]

@Chihying Jenny Wang

1. You would need to submit an application with a self-directed Solo 401k provider that can restate your Fidelity plan documents to their more flexible Solo 401k document platform.

2. When you receive your Solo 401k documents from a company that provides you with checkbook control, a trust agreement should be included. This creates a trust as part of the IRS-approved plan document package and you would not have to take additional steps to pair your plan to the trust (other than executing the signature pages of the documents).

3. In some cases, there may be a benefit to having an LLC for additional asset protection. Your Solo 401k trust can own one or more LLCs that can be added to the structure at any time. The Solo 401k trust does not prevent the use of LLCs in any way, but the trust is sufficient to provide checkbook control and most Solo 401k investors will invest directly with the trust rather than using an LLC.

4. You can roll a traditional IRA in a Solo 401k. A "rollover IRA" typically refers to an IRA that was funded with assets rolled over from an employer plan such as a 401k. A rollover IRA is usually a traditional IRA funded with pre-tax assets. Please note that a Roth IRA cannot be transferred to a Solo 401k (or anything else besides another Roth IRA).

[Chihying Jenny Wang]

Thank you!!! This completely clarified things for me and now I know how to move forward!  Really appreciate you taking the time, Justin, to answer me!  

[Steve C.]

Thank you for everyone contributing to this thread. It is very helpful. 

I didn't fully understand the conversation though, so let me ask specific question. 

I am thinking to invest in real estate syndication deals or turn key properties. 

My understanding is that it is still better to do it with solo 401k (or eQRP) compared to SD IRA.

Pros

- full freedom and doesn't require custodian 

- not subject to UBIT tax (which can be 37~50%)

- better protection with LLC especially with investing in turn key properties

Cons 

- high setup fee (eQRP can cost $5000)

- might require self employment income (not including passive rental income), but there is workaround with eQRP

I think high setup fee can be justified even for real estate syndication deals because it allows to avoid high UBIT tax. 

Is this correct understanding?

Any insight is appreciated. Thank you in advance. 

[Steve C.]

Below was quick summary from Damion Lupo

An eQRP lets you: invest your retirement funds in nearly anything, $58,000 annual contribution limit, no custodian, and avoid a 37% UBIT tax hit (like you have with SD-IRAs).

[Brian Eastman]

A Solo 401k should not cost anything near $5K.  There is no "workaround" for creating an employer sponsored retirement plan without qualifying self-employment.  

Beware of claims from one provider that are contrary to the advice of all other providers.  We all work within the same rules provided by the tax code and department of labor.  Claiming to have a "special" solution that costs 4X+ the industry standard is, um, "special".

BTW, tax in an IRA on Unrelated Debt Financed Income may reach 30%+, but that would be on such a small amount of net taxable income after available deductions that the effective tax rate for the deal is generally not significant. Trying to create a fit for a 401k when no legitimate fit is available is not going to be worthwhile.

[Bernard Reisz]

@Brian Eastman Don't you believe in the adage "you get what you pay for?!" 

(Couldn't resist injecting some humor here. Great post by you, as always!)

[Bernard Reisz]

I have heard of sellers of self-directed retirement plan documents that "qualify" folks as "self employed," for purposes of sponsoring a 401k, by signing them up as affiliate marketing partners. Of course, something of that nature should be always be discussed with an objective professional.